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services. The structures of market both for goods market and service (factor) market are
determined by the nature of competition prevailing in a particular market.
Meaning of Market:
Ordinarily, the term “market” refers to a particular place where goods are purchased and sold.
But, in economics, market is used in a wide perspective. In economics, the term “market” does
not mean a particular place but the whole area where the buyers and sellers of a product are
spread.
This is because in the present age the sale and purchase of goods are with the help of agents
and samples. Hence, the sellers and buyers of a particular commodity are spread over a large
area. The transactions for commodities may be also through letters, telegrams, telephones,
internet, etc. Thus, market in economics does not refer to a particular market place but the
entire region in which goods are bought and sold. In these transactions, the price of a
commodity is the same in the whole market.
According to Prof. R. Chapman, “The term market refers not necessarily to a place but always to
a commodity and the buyers and sellers who are in direct competition with one another.” In the
words of A.A. Cournot, “Economists understand by the term ‘market’, not any particular place in
which things are bought and sold but the whole of any region in which buyers and sellers are in
such free intercourse with one another that the price of the same goods tends to equality, easily
and quickly.” Prof. Cournot’s definition is wider and appropriate in which all the features of a
market are found..
Market Structure:
Meaning:
Market structure refers to the nature and degree of competition in the market for goods and
services. The structures of market both for goods market and service (factor) market are
determined by the nature of competition prevailing in a particular market.
Determinants:
There are a number of determinants of market structure for a particular good.
They are:
(1) The number and nature of sellers.
(4) The conditions of entry into and exit from the market.
This is known as oligopsony. Duopsony and oligopsony markets are usually found for cash crops
such as rice, sugarcane, etc. when local factories purchase the entire crops for processing.
3. Nature of Product:
It is the nature of product that determines the market structure. If there is product
differentiation, products are close substitutes and the market is characterised by monopolistic
competition. On the other hand, in case of no product differentiation, the market is
characterised by perfect competition. And if a product is completely different from other
products, it has no close substitutes and there is pure monopoly in the market.
But in monopoly and oligopoly markets, there are barriers to entry of new firms. Usually,
governments have a monopoly in public utility services like postal, air and road transport, water
and power supply services, etc. By granting exclusive franchises, entries of new supplies are
barred. In oligopoly markets, there are barriers to entry of firms because of collusion, tacit
agreements, cartels, etc. On the other hand, there are no restrictions in entry and exit of firms in
monopolistic competition due to product differentiation.
5. Economies of Scale:
Firms that achieve large economies of scale in production grow large in comparison to others in
an industry. They tend to weed out the other firms with the result that a few firms are left to
compete with each other. This leads to the emergency of oligopoly. If only one firm attains
economies of scale to such a large extent that it is able to meet the entire market demand, there
is monopoly.
2. Monopoly
3. Duopoly
4. Oligopoly
5. Monopolistic Competition
Similarly, the supply of an individual seller is so small a fraction of the total output that he
cannot influence the price of the product by his action alone. In other words, the individual
seller is unable to influence the price of the product by increasing or decreasing its supply.
Rather, he adjusts his supply to the price of the product. He is “output adjuster”. Thus no buyer
or seller can alter the price by his individual action. He has to accept the price for the product as
fixed for the whole industry. He is a “price taker”.
No seller has an independent price policy. Commodities like salt, wheat, cotton and coal are
homogeneous in nature. He cannot raise the price of his product. If he does so, his customers
would leave him and buy the product from other sellers at the ruling lower price.
The above two conditions between themselves make the average revenue curve of the individual
seller or firm perfectly elastic, horizontal to the X-axis. It means that a firm can sell more or less
at the ruling market price but cannot influence the price as the product is homogeneous and the
number of sellers very large.
Moreover, prices are liable to change freely in response to demand-supply conditions. There are
no efforts on the part of the producers, the government and other agencies to control the supply,
demand or price of the products. The movement of prices is unfettered.
Though the real world does not fulfil the conditions of perfect competition, yet perfect competi-
tion is studied for the simple reason that it helps us in understanding the working of an
economy, where competitive behaviour leads to the best allocation of resources and the most
efficient organisation of production. A hypothetical model of a perfectly competitive industry
provides the basis for appraising the actual working of economic institutions and organisations
in any economy.
2. Monopoly Market:
Monopoly is a market situation in which there is only one seller of a product with barriers to
entry of others. The product has no close substitutes. The cross elasticity of demand with every
other product is very low. This means that no other firms produce a similar product. According
to D. Salvatore, “Monopoly is the form of market organisation in which there is a single firm
selling a commodity for which there are no close substitutes.” Thus the monopoly firm is itself an
industry and the monopolist faces the industry demand curve.
The demand curve for his product is, therefore, relatively stable and slopes downward to the
right, given the tastes, and incomes of his customers. It means that more of the product can be
sold at a lower price than at a higher price. He is a price-maker who can set the price to his
maximum advantage.
However, it does not mean that he can set both price and output. He can do either of the two
things. His price is determined by his demand curve, once he selects his output level. Or, once
he sets the price for his product, his output is determined by what consumers will take at that
price. In any situation, the ultimate aim of the monopolist is to have maximum profits.
Characteristics of Monopoly:
The main features of monopoly are as follows:
1. Under monopoly, there is one producer or seller of a particular product and there is no differ-
ence between a firm and an industry. Under monopoly a firm itself is an industry.
3. A monopolist has full control on the supply of a product. Hence, the elasticity of demand for a
monopolist’s product is zero.
4. There is no close substitute of a monopolist’s product in the market. Hence, under monopoly,
the cross elasticity of demand for a monopoly product with some other good is very low.
5. There are restrictions on the entry of other firms in the area of monopoly product.
9. Monopolist’s demand curve slopes downwards to the right. That is why, a monopolist can
increase his sales only by decreasing the price of his product and thereby maximise his profit.
The marginal revenue curve of a monopolist is below the average revenue curve and it falls faster
than the average revenue curve. This is because a monopolist has to cut down the price of his
product to sell an additional unit.
3. Duopoly:
Duopoly is a special case of the theory of oligopoly in which there are only two sellers. Both the
sellers are completely independent and no agreement exists between them. Even though they are
independent, a change in the price and output of one will affect the other, and may set a chain of
reactions. A seller may, however, assume that his rival is unaffected by what he does, in that
case he takes only his own direct influence on the price.
If, on the other hand, each seller takes into account the effect of his policy on that of his rival
and the reaction of the rival on himself again, then he considers both the direct and the indirect
influences upon the price. Moreover, a rival seller’s policy may remain unaltered either to the
amount offered for sale or to the price at which he offers his product. Thus the duopoly problem
can be considered as either ignoring mutual dependence or recognising it.
4. Oligopoly:
Oligopoly is a market situation in which there are a few firms selling homogeneous or differenti-
ated products. It is difficult to pinpoint the number of firms in ‘competition among the few.’ With
only a few firms in the market, the action of one firm is likely to affect the others. An oligopoly
industry produces either a homogeneous product or heterogeneous products.
The former is called pure or perfect oligopoly and the latter is called imperfect or differentiated
oligopoly. Pure oligopoly is found primarily among producers of such industrial products as
aluminium, cement, copper, steel, zinc, etc. Imperfect oligopoly is found among producers of
such consumer goods as automobiles, cigarettes, soaps and detergents, TVs, rubber tyres,
refrigerators, typewriters, etc.
Characteristics of Oligopoly:
In addition to fewness of sellers, most oligopolistic industries have several common
characteristics which are explained below:
(1) Interdependence:
There is recognised interdependence among the sellers in the oligopolistic market. Each
oligopolist firm knows that changes in its price, advertising, product characteristics, etc. may
lead to counter-moves by rivals. When the sellers are a few, each produces a considerable
fraction of the total output of the industry and can have a noticeable effect on market conditions.
He can reduce or increase the price for the whole oligopolist market by selling more quantity or
less and affect the profits of the other sellers. It implies that each seller is aware of the price-
moves of the other sellers and their impact on his profit and of the influence of his price-move on
the actions of rivals.
Thus there is complete interdependence among the sellers with regard to their price-output
policies. Each seller has direct and ascertainable influences upon every other seller in the
industry. Thus, every move by one seller leads to counter-moves by the others.
(2) Advertisement:
The main reason for this mutual interdependence in decision making is that one producer’s
fortunes are dependent on the policies and fortunes of the other producers in the industry. It is
for this reason that oligopolist firms spend much on advertisement and customer services.
As pointed out by Prof. Baumol, “Under oligopoly advertising can become a life-and-death
matter.” For example, if all oligopolists continue to spend a lot on advertising their products and
one seller does not match up with them he will find his customers gradually going in for his
rival’s product. If, on the other hand, one oligopolist advertises his product, others have to follow
him to keep up their sales.
(3) Competition:
This leads to another feature of the oligopolistic market, the presence of competition. Since
under oligopoly, there are a few sellers, a move by one seller immediately affects the rivals. So
each seller is always on the alert and keeps a close watch over the moves of its rivals in order to
have a counter-move. This is true competition.
The chain of action reaction as a result of an initial change in price or output, is all a guess-
work. Thus a complex system of crossed conjectures emerges as a result of the interdependence
among the rival oligopolists which is the main cause of the indeterminateness of the demand
curve.
If the oligopolist seller does not have a definite demand curve for his product, then how does he
affect his sales. Presumably, his sales depend upon his current price and those of his rivals.
However, a number of conjectural demand curves can be imagined.
For example, in differentiated oligopoly where each seller fixes a separate price for his product, a
reduction in price by one seller may lead to an equivalent, more, less or no price reduction by
rival sellers. In each case, a demand curve can be drawn by the seller within the range of
competitive and monopoly demand curves.
Leaving aside retaliatory price movements, the individual seller’s demand curve under oligopoly
for both price cuts and increases is neither more elastic than under perfect or monopolistic
competition nor less elastic than under monopoly. It may still be indefinite and indeterminate.
This situation is shown in Figure 1 where KD1 is the elastic demand curve and MD is the less
elastic demand curve. The oligopolies’ demand curve is the dotted kinked KPD. The reason is
quite simple. If a seller reduces the price of his product, his rivals also lower the prices of their
products so that he is not able to increase his sales.
So the demand curve for the individual seller’s product will be less elastic just below the present
price P (where KD1and MD curves are shown to intersect). On the other hand, when he raises the
price of his product, the other sellers will not follow him in order to earn larger profits at the old
price. So this individual seller will experience a sharp fall in the demand for his product.
Thus his demand curve above the price P in the segment KP will be highly elastic. Thus the
imagined demand curve of an oligopolist has a comer or kink at the current price P. Such a
demand curve is much more elastic for price increases than for price decreases.
(7) No Unique Pattern of Pricing Behaviour:
The rivalry arising from interdependence among the oligopolists leads to two conflicting motives.
Each wants to remain independent and to get the maximum possible profit. Towards this end,
they act and react on the price-output movements of one another in a continuous element of
uncertainty.
On the other hand, again motivated by profit maximisation each seller wishes to cooperate with
his rivals to reduce or eliminate the element of uncertainty. All rivals enter into a tacit or formal
agreement with regard to price-output changes. It leads to a sort of monopoly within oligopoly.
They may even recognise one seller as a leader at whose initiative all the other sellers raise or
lower the price. In this case, the individual seller’s demand curve is a part of the industry
demand curve, having the elasticity of the latter. Given these conflicting attitudes, it is not
possible to predict any unique pattern of pricing behaviour in oligopoly markets.
5. Monopolistic Competition:
Monopolistic competition refers to a market situation where there are many firms selling a differ-
entiated product. “There is competition which is keen, though not perfect, among many firms
making very similar products.” No firm can have any perceptible influence on the price-output
policies of the other sellers nor can it be influenced much by their actions. Thus monopolistic
competition refers to competition among a large number of sellers producing close but not
perfect substitutes for each other.
It’s Features:
The following are the main features of monopolistic competition:
(1) Large Number of Sellers:
In monopolistic competition the number of sellers is large. They are “many and small enough”
but none controls a major portion of the total output. No seller by changing its price-output
policy can have any perceptible effect on the sales of others and in turn be influenced by them.
Thus there is no recognised interdependence of the price-output policies of the sellers and each
seller pursues an independent course of action.
Products are close substitutes with a high cross-elasticity and not perfect substitutes. Product
“differentiation may be based upon certain characteristics of the products itself, such as
exclusive patented features; trade-marks; trade names; peculiarities of package or container, if
any; or singularity in quality, design, colour, or style. It may also exist with respect to the
conditions surrounding its sales.”
Likewise, an increase in its price will reduce its demand substantially but each of its rivals will
attract only a few of its customers. Therefore, the demand curve (average revenue curve) of a firm
under monopolistic competition slopes downward to the right. It is elastic but not perfectly
elastic within a relevant range of prices of which he can sell any amount.
(5) Independent Behaviour:
In monopolistic competition, every firm has independent policy. Since the number of sellers is
large, none controls a major portion of the total output. No seller by changing its price-output
policy can have any perceptible effect on the sales of others and in turn be influenced by them.